Over the past five years, essentially all of the growth in U.S. natural gas production has come from the Marcellus/Utica shale regions in the Northeast, constrained only by takeaway capacity, and as of 2015 the region began producing more gas than it can consume almost all year round. There are about two dozen pipeline projects planned to come online totaling nearly 17.5 Bcf/d over the next few years to help Northeast producers target demand in other regions, namely growing power generation demand, LNG export markets along the U.S. Gulf Coast, (see Back Down South), and Mexico via Texas. But since mid-2014, drilling activity has slowed dramatically across the U.S., including the Northeast, and output in Marcellus/Utica has flattened out. Is it possible that the market is headed toward an overbuild situation in which Northeast takeaway capacity will end up far exceeding regional production? That has certainly happened in just about every other segment of the U.S. energy market — from pipes moving gas east out of the Rockies and Texas, to crude by rail, to crude oil pipelines to the Gulf –– with important implications for the market. Could it happen in the Northeast? Today, we begin a series on the prospect of an overbuilt Northeast gas market.
For years now, the drumbeat about the Northeast natural gas market has been about the meteoric rise of native supply in the region and the perpetually constrained capacity to get this gas to market, whether within the Northeast to New England or the Mid-Atlantic states or to growing demand markets south and west of the region. We’ve written plenty about it here in the RBN blogosphere, and there’s a sense of Yogi Berra’s “déjà vu all over again” to the story: Each year, some takeaway capacity is added, but is quickly followed by a surge in Marcellus/Utica production that fills up the new capacity, leading back to a capacity-constrained market and depressed supply prices. The constraints have also gotten increasingly dire because most of the supply that used to flow into the old, supply-starved Northeast region has been pushed out and there are few more inbound flows to push out (see End of the Displacement). What’s more, starting in 2015 the region became an overall net producer (see One Step Closer), which means that in order for the region to balance (as the gas market must) any incremental molecule of Northeast production from here on out will need to serve demand outside the region. That has only increased the Northeast’s dependence on the timing of incremental takeaway capacity.
But now the region’s story is approaching a turning point. The bulk of the takeaway capacity projects in the works for the past 2-3 years will begin to come to fruition over the next few years, starting in fourth quarter 2016. These capacity additions will usher in a new era for Northeast producers of unconstrained access to growing demand from power generators and from LNG export terminals along the Gulf Coast, and potentially allow Marcellus/Utica molecules to compete for gas buyers and exporters as far south as the Texas/Mexico border (see Wednesday’s blog, I Saw Miles and Miles of Texas –– Northeast Natural Gas vs. Gulf Coast Production; RBN’s new Drill-Down report, “I Saw Miles and Miles of Texas: Mexican Demand, LNG Exports Pull Marcellus/Utica Gas to Lone Star State” is also available to Backstage Pass subscribers, or for individual purchase). But in the last year and a half, oversupply and low gas prices have stalled Marcellus/Utica production growth, raising an altogether different concern for those who have invested heavily in this takeaway capacity: Will Northeast takeaway capacity get overbuilt? After years of trailing behind, could Northeast takeaway capacity finally outstrip the Marcellus/Utica producers’ ability to keep growing production? There are two parts to answering that: 1) What will Northeast production do over the next few years; and 2) How much pipeline capacity will ultimately be built. Today we start with a closer look at the first part of that equation — the Northeast production outlook.